The Supply of Housing and Real Estate in China: Land Allocation and Building Densities

The factors driving demand dynamics of Chinese housing markets have been extensively researched: local demographic evolution, growth in employment, the extent to which the Hukou system is binding, mortgage rates, and investment motivations are all receiving increasing attention from researchers.

Supply-side issues are also being studied but to a smaller extent. Therefore the dynamics of housing supply in urban China are not yet entirely well understood. Critical amongst these are: the timing of land development, the quantitative and price responses to increase land allocations from local governments, and the vertical strategies of developers and local governments (what building heights, and how these vary with land availability).

There are many characteristics that make housing supply dynamics in China very different from the US and other countries. Generally, it is almost impossible to conceptualize an upward-sloping housing supply function in urban markets in China capturing a stable relationship between housing supply (construction) and home values. This is because the supply of land changes discretely every 20 and 5 years according to the national and provincial 5-year plans and in ways that are very difficult to forecast ex ante by market agents. In parallel, it is also very difficult to characterize the extent to which supply responds to demand pressures via vertical growth. The decentralized nature of urban development and the fact that public zoning and parcel maps are not available makes it difficult for researchers and the public to know exactly what is the massing and density of the new development, and how changes in land allocation translate into a total number of new housing units.

Our research team will examine both horizontal (land) and vertical (FAR) aspects of housing supply in Urban China. We will devote a team of research assistants to unearth the details of the successive 5-year plans at the national, provincial, and city level to document and codify all the land allocations to provincial governments, and how the provincial governments “pass” land allocations to municipal governments. We then will learn about how these “semi-experimental” large and discrete shocks to the supply of urban land translate into outcomes in the built environment and the economics of housing markets. How does residential construction (sites and densities) and housing prices respond to larger (versus smaller) “exogenous" land allocations? How does the spatial development strategies of the municipality react to the size of the allocations coming from “above” in a top-down fashion? We will combine our own land allocation data with data on housing prices and construction costs as developed by the Tsinghua team, and with our newly constructed data on housing densities. This later part project will monitor the levels of China's rapid urbanization using remotely sensed data released by an ongoing European space mission. We will derive a measure of urbanization intensity by not only registering extent of surface area dedicated to urban uses but also the volume of developed space and estimates the development intensity for a large and representative sample of Chinese cities.

Combining all the data sources above will explore the determinants of the spatial distribution urbanization intensity within and across cities and the time dynamics of urbanization in order to better understand how the supply of land and built space respond to market demand pressures and government policies.